Philippines Monetary Policy December 2017


Philippines: Central Bank keeps rates steady at December meeting

December 14, 2017

At its meeting on 12 December, the Central Bank decided to leave the Overnight Reverse Repurchase Facility (RRP) rate unchanged at 3.0%. It also left the Overnight Lending Facility (OLF) and the Overnight Deposit Facility (ODF) rates steady at 3.5% and 2.5%, respectively. Moreover, the Bank kept the reserve requirement ratios untouched. The decision to keep rates unchanged was due mainly to inflation forecasts for 2018 and 2019 that projected inflation will remain within the Bank’s target of 3.0% plus or minus 1 percentage point. The ODF establishes the floor, and the OLF establishes the ceiling of the interest rate corridor system. All decisions were in line with market expectations.

The decisions follow manageable and within-target inflationary pressures, along with robust economic growth. External demand remains buoyant, however, downside geopolitical risks to foreign trade linger. GDP expanded 6.9% year-on-year in Q3; economic growth was underpinned by strong private consumption and fixed investment, as well as robust public infrastructure spending. Moreover, buoyant consumer and business sentiment and robust credit growth are also supporting economic activity; the strong pace of economic and credit growth could result in rising price pressures. Consequently, the majority of FocusEconomics panelists project one or more rate hikes next year.

Inflation in November declined after accelerating for four consecutive months. It came in at 3.3%, down from October’s three-year high of 3.5%. Price pressures in November eased on the back of slower annual increases in prices for food and non-alcoholic beverages. However, risks remain tilted to the upside, partly due to possible future increases in oil prices. The government’s proposed tax reform could also put pressure on prices at the beginning of 2018. Social safety nets and productivity growth should, however, temper inflationary pressures over the medium term. Moreover, the proposed shift from quantitative restrictions to tariffs in the rice industry should further temper inflation.

In its communiqué, the Bank stated that the current monetary policy setting should be kept going forward. However, it also specified that it would maintain a vigilant approach to guard against risks to inflation while supporting economic growth, meaning that future rate hikes would likely be implemented with a view to protecting growth prospects.

Against this backdrop, FocusEconomics Consensus Forecast panelists expect that the Central Bank will raise the RRP this year, with an average forecast of 3.54% for the end of 2018 and 3.92% at the end of 2019.

Author: Massimo Bassetti, Economist

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Philippines Monetary Policy Chart

Philippines Monetary Policy December 2017 1

Note: Reverse Repurchase Rate in %.
Source: Central Bank of the Philippines (BSP).

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